Shorting Brazilian Shares 2 Times Is Best ETF Wager This Year

The best bet in exchange-traded funds this year has been to double down against Brazil.

The ProShares UltraShort MSCI Brazil Capped ETF, which makes a leveraged investment against Brazilian shares that essentially doubles the wager, is posting the best performance among 1,200 U.S. ETFs tracked by Bloomberg this year. Its 82 percent gain is almost twice the return of the second-best ETF, another leveraged fund that profits when U.S. energy shares decline.

The trade against Brazilian stocks has been especially profitable this year as the tumble in equities is exacerbated by the 31 percent plunge in the real that’s made it the worst performing emerging-market currency. The country’s assets are selling off amid a corruption scandal at the state-controlled oil company, a deeper-than-expected economic recession and the government’s failure to shore up fiscal accounts. The deterioration in the nation’s finances has earned it three downgrades in the past 18 months. The last one, by Standard & Poor’s, cost Brazil its investment grade.

“There’s a really big currency risk, which has a direct impact on listed companies,” said Jason Vieira, the chief economist at Infinity Asset Management, which oversees 200 million reais ($52.2 million) of investments.

The MSCI Brazil 25-50 Price USD Index, the underlying gauge for the ProShares ETF, has dropped every year since 2011, when President Dilma Rousseff started her first term. This year, it’s tumbled 34 percent, while Brazil’s benchmark Ibovespa equity index has dropped 33 percent in dollar terms.

S&P cut Brazil to BB+, one level below investment grade, on Sept. 9, with a negative outlook, after the government presented a budget for 2016 with a deficit of 0.5 percent of gross domestic product just weeks after revising its initial surplus target. The downgrade prompted Rousseff to speed up measures to cover the gap, with Finance Minister Joaquim Levy and Planning Minister Nelson Barbosa announcing Monday an austerity plan totaling 65 billion reais.

Moody’s Investors Service, which has Brazil at the lowest level of investment grade, said the measures were a positive development, but called the country’s targets modest.

“The negative outlook is obviously an additional problem,” Infinity Asset Management’s Vieira said. “The government is announcing more of the same. It needs to be put into action, and we haven’t seen that so far.”

The best bet in exchange-traded funds this year has been to double down against Brazil.The ProShares UltraShort MSCI Brazil Capped ETF, which makes a leveraged investment against Brazilian shares that essentially doubles the wager, is posting the best performance among...